Nudge theory back in fashion with Tories

This morning saw the return of the nudge to Conservative economic policy (though, of course, its most ardent fans would say it never went away), at a two-hour session on the Tories' favourite American import.

Nudge is the title of a book by eminent American behavioural economists Richard Thaler and Cass Sunstein. I spent a few years on an anthropology undergraduate course, so their chief revelation, that people are imperfect and accordingly make imperfect decisions, sounded like a term one topic.

But, before banks started to go down and biographies of John Maynard Keynes replaced Nudge as key bedtime reading, the Tories liked it so much that David Cameron announced a piece of classical nudge thinking: households would be told whether their gas or energy usage was higher or lower than other people on their street. Peer pressure would hopefully drive down their usage.

And they were ribbed for it. The wags around these parts quipped that "now was no time for a nudge". Sample comment: "How can you nudge a banker into renouncing their bonus?"

Second sample comment: "How can you nudge HSBC into approving more mortgages?"

Third sample comment: "Fudge not nudge" ... You get me.

If you were a Tory, that would be quite annoying. If you were Labour, you would think it just desserts; they point to government pension policy (you've got to opt out of the scheme, rather than into it) as evidence that Labour was nudging people half a decade ago.

Since then we've not heard much – except from Labour spinners, keen not to let anyone forget Nudge. From them, slightly more sophisticated critiques have emerged – for example, how can the Tories opt for behaviour change as a tool of public policy when they announced at last year's party conference that they'd slash as much government advertising as possible, including the Central Office of Information, responsible for ads targeted at raising cancer awareness, for instance? A nudge by the government that costs millions.

Well, the Tories must now have calculated that Thaler's ideas add some sheen to their intellectual armoury – because this morning, Thaler was back, appearing with Cameron at a speech in the City.

Cameron's speech set out how his party would restore authority to the Bank of England, which he said had been "debanked" – lost its banking expertise. Erm, no nudge here. The party, he said, was consulting on giving the BoE powers to go into bad banks (building on James Sassoon's report). Cameron said:

So we are considering the suggestion that we should give the Bank of England further power to go into individual banks ... to tell them they have not got enough capital, tell them there's too much leverage, tell them to sort themselves out ... or expect the full authority of the Bank.

Nudge was only mentioned as something that would inform Tory attempts to regulate:

As Richard Thaler has shown, when you design policy so that it reflects how people think and act, you really can encourage greater responsibility. But we don't just need to promote responsibility among individuals – we need to promote it across the whole financial system.

But Thaler himself was refreshingly concrete in his proposals. He did not say what should be government policy, but you could see the eyes of shadow cabinet members dancing. Instead of falling into the trap of handing over the monitoring of the market to regulators, Thaler said, let people do it themselves.

I simplify grossly, but essentially you assign a piece of paper to every transaction, you stipulate that that piece of paper features key bits of data on that transaction and you find a computer system into which you can feed it all and allow everyone to monitor the nature of these transactions.

Thaler's goal is too improve disclosure. I suppose it is coherent with nudge theory as we know it, in as much it understands that imperfect humans find the contortions of the market impossible to track and a system needs to be devised which is more, erm, dummy-proof. This got him endearingly excited: "We can get the market to do the watching if we give it the data."

Out of this mix, Thaler gets a regulatory system more sensitive to real live human beings; Cameron gets the same and also something appealing to the traditional right wing of his party: an extremely light-touch regulatory system.